Market Direction: BULLISH alert
issued 2/15/2018
The Longest Bull Run in History...
S&P 500 revenues and earnings
soared to record highs during the second-quarter. No wonder the S&P 500
stock price index is also in record-high territory. Let’s review the latest
data before turning to the outlook for the fundamentals driving the stock
market:
1. Revenues at all-time high: Most extraordinary is that S&P 500 SPX, -0.04% revenues jumped 10.3%
year-over-year in the last quarter to a new record high. Normally this far into an economic
expansion, revenues growth tends to be around 4%-6%.
2. Earnings at all-time high: S&P 500 earnings as measured by Thomson Reuters I/B/E/S
soared 25.6% year-over-year in the last quarter, reflecting the strength in
revenues as well as the cut in the corporate tax rate.
3. Profit margins at all-time high: Notwithstanding all the chatter about rising costs,
the S&P 500 corporate profit margin rose once again to a record high of
10.9%. It was at a record 10.1% during the fourth quarter of 2017 before the
tax cut. It jumped to 10.5% during the first quarter of 2018 thanks to the tax
cut. Yet here it is at yet another record high.
The bears have been growling during most of the
current bull market that the margin is about to revert to the mean. They’ve
been warning all year that the flattening of the yield curve increases the risk
of a recession. They’ve cautioned that the escalating trade war could trigger
the expansion’s downfall. They’ve been expecting rising labor costs and
commodity prices to squeeze profit margins. Nonetheless, the bears have been
sounding the alarm that rising costs will boost inflation, which would send
bond yields higher. They’ve touted the worrisome notion of “peak earnings,”
which really means that the growth rate of earnings is bound to slow next year.
And of course, the bull could drop dead at any time, they say, simply because
it is so old.
4. Leading higher: The yield curve is just one of the 10 components of the
Index of Leading Economic Indicators, which has been setting fresh record highs
for the past 17 months through July.
This augurs well for the Index of
Coincident Economic Indicators, which is also at a record high. This index’s
year-over-year growth rate is highly correlated with the comparable growth rate
for real GDP. The former was 2.4%
through July, confirming that the underlying growth of the economy continues to
fluctuate between roughly 2%-3%, i.e., at a sustainable pace. The latest GDPNow estimate shows
real GDP growing 4.3% (saar) during the third quarter. That translates into a
3.2% year-over-year growth rate.
5. Trade war: President Donald Trump unilaterally has called a
cease-fire in his trade war with Europe. Progress is reportedly being made in
negotiations with Mexico. Talks will resume with China later this month.
Perhaps it’s time to stop using the adjective “escalating” to describe the
trade war? What if this all leads to less protectionism once the fog of war
clears? This possibility sure helps explain why the U.S. stock market has performed so well so
far this year.
6. Inflation: It’s true that there are more signs of mounting inflationary pressures. They just aren’t
bubbling up into the PPI, CPI, and wages. To have cost pressures rising even as
profit margins likewise are rising without discernibly higher price inflation
is a curious set of circumstances. Could it be that productivity is finally making
a comeback? That certainly would explain things well. Also, the strong dollar
is helping to keep a lid on inflation. Recently, commodity prices have been
falling, not rising.
7. Earnings: There’s no doubt that earnings growth will fall from over
20% this year to under 10% next year. So what? Earnings should still be growing
in record-high territory in 2019. Stock prices should follow suit.
$tockMarketDirection proprietary model is currently BULLISH. We strongly encourage you to monitor
positions closely, exercise proper money management strategies and follow us at $tockMarketDirection for ALERTS we
may issue advising a change in the current market direction. Stay tuned
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The all-time highs since our initial
recommendation to go LONG
this market. Here is how the markets have performed:
Stock Market
Direction Recommendation (2/15/2018)
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Dow
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up 688.45 points a 2.73% gain
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8/21/18
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Nasdaq
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up 676.88 points a 9.33% gain
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7/25/18
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S&P 500
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up 136.34 points a 4.99% gain
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8/22/18
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Related Link: http://www.stockmarket-direction.com/
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